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James Pethokoukis

No to the flat tax and other stale ideas

1. The flat tax: In the 2012 Republican presidential race, candidates including Rick Perry and Newt Gingrich proposed a flat tax on personal income. The idea seems likely to pop up again in 2016. Most flat-tax proposals are a version of a flat consumption tax devised by economists Robert Hall and Alvin Rabushka. If you were creating a tax code ex nihilo, the flat tax might well be the way to go. Simulations, not to mention common sense, suggest that a flat tax with a low rate would produce a larger economy than the current mess of a tax code does.

But we are not starting from scratch. It would be problematic to transition to a flat tax — at least at the 15–20 percent rate typically proposed — from a tax code that has nearly half of Americans paying no income tax. A flat tax would probably generate too little revenue, making budget deficits worse. One smart way to tweak the idea would be to keep the consumption-tax aspect while adding a more progressive rate structure.

2. The gold standard: The party platform adopted at the Republican National Convention in Tampa included a plan calling for the creation of a commission to consider restoring the dollar-gold link. Been there, done that. A similar panel established by President Reagan dismissed the idea. More recently, a University of Chicago survey of 40 economists found unanimous and vehement opposition to resurrecting the gold standard.

Those results are hardly surprising. The gold standard played a central role in the Great Depression and the severe deflation that accompanied it. Its return would hamstring the Federal Reserve in any effort it made to prevent future recessions from morphing into depressions. The latter, by the way, tend to usher in dramatic expansions in the size of government. A better option would be to anchor monetary policy not in stuff mined from the ground, but rather in futures contracts linked to market forecasts of nominal gross domestic product.

Blowback

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Transition? Problematic? I got this one. Social Security and other withholdings are already income taxes, it’s just that Politicians have never wanted to admit it. Whatever the average percentage is of withholdings to income for the no-taxes tax braket, that’s the new flat tax rate. Yes, the rich won’t have that cut-off point for “that thing they used to call FICA” where they don’t have to contribute anymore, but it seems a reasonable compromise to make because the thing we really need to be seeking is getting everybody some skin in the game.

“A better option would be to anchor monetary policy not in stuff mined from the ground, but rather in futures contracts linked to market forecasts of nominal gross domestic product.”

How the heck do people know that would work?

Okay, that just a rhetorical question, but the point is that most people, me included, don’t have a clue what Pethokoukis means by that.

And that is why the gold standard captures the approval of so many — it’s a certain, physical, limited measurement one can get their fingers on and heads around. Also gold appears, anyway, to be something that can’t be manipulated and the trust in it being there can be separated from the “crooks” in government.

You know what I think when I hear “futures contracts linked to market forecasts of nominal gross domestic product”? %@#*in’ Greeks %@#*in’ up their economy. Well, I do when I’m not thinking Timmy Geithner. I don’t trust any government official or politician now. They’re all %@#*in’ liars as far as I’m concerned.

I’m not for the gold standard, by the way. I don’t know what standard I’m for right now, but the noose standard is looking pretty good.

Something is happening here. James Pethokoukis has always been one of the most by-the-books conservative economists out there. Whether or not he has believed that a flat tax and the balanced budget amendment are bad ideas, I could never see him publishing something like this in the past.

Yeah, I am being a bit egregious on my side.
I agree, I like it when things are defined properly.

astonerii on February 19, 2013 at 8:09 PM

My plan kinda needs a second part, though. A Paul Krugman of the Right to say that deficits don’t matter, we’re spending too small by a hundredths and the real mega stimulus we need . . . is to BUY OUT SOCIAL SECURITY. One step, one check for everybody, over, done, finito.

Something is happening here. James Pethokoukis has always been one of the most by-the-books conservative economists out there. Whether or not he has believed that a flat tax and the balanced budget amendment are bad ideas, I could never see him publishing something like this in the past.
veritas43 on February 19, 2013 at 8:14 PM

I’ve likes most of his stuff but I take this as an admission that (from his perspective) there isn’t anything that can be done to stave off the coming fiscal crises and that the best we can hope to do is manage the decline or put it off for a bit.

The gold standard played a central role in the Great Depression and the severe deflation that accompanied it.

The Crash was caused by an inflationary monetary policy done within a gold standard, and the Great Depression was caused by Hoover and FDR working against market forces trying to prevent the correction that needed to happen. This guy is supposed to be conservative? It’s like he had been brainwashed by leftist talking points.

We have to get over our fear of recessions. They are a vital part of the business cycle. Trying to eliminate them has caused one insane bubble after another.

We need to learn to accept the good with the difficult.

trigon on February 19, 2013 at 8:23 PM

I’ve never understood how regulations aren’t just a delaying tactic resulting in the market building up more and more energy until a weakness is found, like with an earthquake, and then BAM. And worse, then all that liquidity the Fed will-it-blends day in and day out just winds up being all such San Francisco Bay fill dirt just waiting to magnify the longitudinal waves.

BUY OUT SOCIAL SECURITY. One step, one check for everybody, over, done, finito.

HarneyPeak on February 19, 2013 at 8:22 PM

I’ve got an idea for that. I’d like to privatize SS.

Everybody falls into one of three categories. 1) Those not contributing, yet. They get a private account. The money they contribute is theirs. When they die it can be passed to their heirs. 2) Those currently or very soon to receive benefits. They get a private account funded by the government. This account should be funded such that the interest will pay them a small amount more than current SS would pay them. When they die, the principal reverts back to the government. 3) Those who have contributed, but are a ways away from retirement. The government funds their private account an amount as if they had paid into a private account all along. At the date this plan becomes active, they take over funding. When they die, the amount the government has funded reverts back to the government. The amount they fund is theirs for their heirs.

Money in the accounts can be invested in a number of publicly managed investment funds. You could have stock funds, money-market funds, bond funds, real estate funds, etc. Every account would have to be spread out over a number of different funds, say between 5 and 10 different funds to spread risk.

It’s very necessary that money funded into accounts by the government be returned and retired to reduce the risk of inflation.

Like illegal immigration, how long you succeeded in your crime should not absolve you of the crime. Social Security is a crime against the next generation called slavery.
How about we do the right thing and just close it out and do what the Supreme Court of the United States of America says is perfectly constitutional, NOT PAY ANYONE ONE THIN DIME OF THEIR STOLEN GOODS.

Something is happening here. James Pethokoukis has always been one of the most by-the-books conservative economists out there. Whether or not he has believed that a flat tax and the balanced budget amendment are bad ideas, I could never see him publishing something like this in the past.
veritas43 on February 19, 2013 at 8:14 PM

Maybe he’s turning into another Bruce Bartlett. His notions that the gold standard contributed to the Great Depression and that the Federal Reserve can’t be hamstrung by it, so that the economy can be “managed” properly, are what you expect from a liberal economist.

There’s countless obstacles to getting fairer taxes. But in the end, the goal is NOT fundamentally financial in nature. Too many Americans have been kindly and gently and absolutely disenfranchised from the Democratic process. I am 5000% sure that we see the kind of ridiculous behavior from Government the way we do because our most common-sense segment of the population IS NOT PARTICIPATING. Some would say we don’t need their input but I say not having them is killing us.

Would that include people who suggest we immediately create out of thin air somewhere north of $50 trillion dollars to be handed out to people for multi-decades long retirement plans? Those kinds of common-sense people? Of course, nothing was said about their health care… another problem that is eating away future generation’s wealth as though they are slaves.

Would that include people who suggest we immediately create out of thin air somewhere north of $50 trillion dollars to be handed out to people for multi-decades long retirement plans? Those kinds of common-sense people? Of course, nothing was said about their health care… another problem that is eating away future generation’s wealth as though they are slaves.

astonerii on February 19, 2013 at 8:58 PM

Well, you got me, there. Specially with a hundred plus years of constitutional negligence, subversiveness and just plain silly fairy talk about enacting Social/Economic “justice” when the framers couldn’t have expressed more clearly that such a thing would doom the whole works.

The government is already creating money out of thin air. What I’m proposing would keep the ‘funny’ money confined to investment accounts and then withdraw if after it had served it’s purpose. Since it would never be out in the general economy, it shouldn’t be overtly inflationary. I’m not without concerns on this point, though, myself. All I’m really doing is trying to put forth an idea that would get the government, eventually, almost entirely out of the SS business. It would, in a couple of generations, end the theft that the government has perpetrated.

So far as health care goes, I’d like to see the government out of that, too. Employers also. People should buy their own insurance. Possibly coupled with an HSA. If the government does have a role it should be in tort reform. Maybe reform of the drug patent laws to favor cures rather than palliative treatments. There might be a role for a small tax to create a fund to cover individuals for catastrophic healthcare situations. That would also help to keep individual policy costs down.

Well, you got me, there. Specially with a hundred plus years of constitutional negligence, subversiveness and just plain silly fairy talk about enacting Social/Economic “justice” when the framers couldn’t have expressed more clearly that such a thing would doom the whole works.

HarneyPeak on February 19, 2013 at 9:07 PM

Just pushing the guy’s argument to its reality.
Imagine 54 trillion more dollars chasing a limited number of money making opportunities to earn that interest payment that pays the retiree. There is no good way to solve this issue.

People who are 70 years old and been out of the workforce for 8 years or so are not going to be very capable of earning their own living. A widow who never worked and is living off the welfare social security check is likely to find it impossible to earn a living even the lowliest of.

Then again, going on the way we are, where the government is replacing the role of children in the secure futures of aging people, is destroying this nation, making slavery an acceptable lifestyle again, driving the dearth in births, the lack of caring about education and other trends which make the future of this nation much darker than it naturally should be.

If it were up to me, there would be a constitutional amendment which prevented any taxation for the purpose of funding individuals lives or the payments for such.
I also would go back to having the states collect the taxes which pays for the federal government, giving them ultimate final arbitration on what the federal government can spend.

The government is already creating money out of thin air. What I’m proposing would keep the ‘funny’ money confined to investment accounts and then withdraw if after it had served it’s purpose. Since it would never be out in the general economy, it shouldn’t be overtly inflationary. I’m not without concerns on this point, though, myself. All I’m really doing is trying to put forth an idea that would get the government, eventually, almost entirely out of the SS business. It would, in a couple of generations, end the theft that the government has perpetrated.

So far as health care goes, I’d like to see the government out of that, too. Employers also. People should buy their own insurance. Possibly coupled with an HSA. If the government does have a role it should be in tort reform. Maybe reform of the drug patent laws to favor cures rather than palliative treatments. There might be a role for a small tax to create a fund to cover individuals for catastrophic healthcare situations. That would also help to keep individual policy costs down.

trigon on February 19, 2013 at 9:09 PM

Most of what your end goals are are good. But creating $50 billion dollars and having that money be invested means that those funds will be chasing limited resources. Gold bars, oil reserves, stocks, bonds and so forth. It is basically a bubble instantly inflated.

I for one am glad that in my lifetime the end of this nation will occur. At least I will not be passing onto my children a failed state, I figure it can go on til about 2022 at which point it will have gone beyond the point that even Romney supporters can be too blind to see the truth of the situation. Not claiming your support of any candidate, just picking a particularly poor vision group of people.

Yeah. You’re going to get some asset inflation. Probably not as much as you might think, though. As the ‘funny’ money gets retired, it will tend to return asset values to normal. Also, since this would largely be a buy and hold scenario rather than a churn scenario, I suspect you wouldn’t get as much volatility as you might otherwise.

I don’t have any problem with getting the government out of all it’s unauthorized activities and seeing the US continue. I see it as a very worthwhile undertaking. It’s just been maneuvered off track by the wrong people.

Make no mistake. I’m of the opinion that it’s all going to crash. And, I’m no Romney supporter.

Make no mistake. I’m of the opinion that it’s all going to crash. And, I’m no Romney supporter.

trigon on February 19, 2013 at 9:32 PM

Well, I like most of what you say.

I guess the spot that gets me is that it is those old people who for generations of their lives kept voting to continue this extra constitutional activity that you want to hand over an account I calculate out to be about $600,000 in order to pay their benefits through interest alone. $600,000 is a conservative number in several ways. It could be smaller with higher targeted interest returns, or it could and likely should be much more to ensure they get inflation adjusted dollars as they age.

I am not sure where I would fit into all of this, am I close to retirement to get paid back or what? But my paid in dollars were never meant for me, ever, the law specifically says it pays out what is paid in pretty much like a pay as you go system with a tiny fake trust fund put there to dupe the morons of the world into thinking their money is there waiting for them to make it around the sun enough times to collect.

I’d say 600K is probably too much. 300K at 5% would pay you about 15K a year. Most people I’m aware of who get SS don’t get that much. And, It’s not really handing that money. They’ll get the interest. The principal will go back to the treasury when they die. Assuming they are funded by the government.

As to the fact that they are idiot voters, I can’t do anything about it other than try to put an end to the idiocy they’ve supported. I see it as better to do it without blood in the streets.

Your funding assuming you are working would be that you’re covered by the government for everything you’ve put in already. I know the law says otherwise, but most idiots don’t know that and if you try to enforce reality on them, they’ll balk and you’d never get this implemented. When it goes active, you’d start paying into your account on top of the government funding. When you die, the portion of your account funded by government money would go back to the government. The portion you funded would go to your heirs. Being dead, you won’t care all that much about the government money.

I might be missing part of your argument. Interest rates are not always going to be 5%, right now they are about .5% to 2.5%. If you allow risky investments with any risk, the retiree may end with no money to return to the government or to live on. In order to get the 2.5% today, you have to be willing to put your money into a 10 year treasury. Of course, if the accounts are all government treasuries, the government still has to collect that same amount of money in taxes to pay the person. Of course, if you allow investments outside of the government, this sets up the situation where any market crash destroys everything and the incentives for the government to get involved and pay trillions of dollars to wall street become HUGE. Of course what this means is that like under Bush, the government will do what ever it takes in order to keep the balloon inflating and preventing it from popping. It really does nothing to solve the problem and sets us up for massive future liability and extremely likely negative out comes.

Better to just let it burn I think. Nothing as refreshing a just desserts! The USA will survive, and likely will revert back 150 years culturally and politically, lose a decade of prosperity followed by several decades of supreme prosperity.

I have always dreamed of driving through los angeles with no significant congestion to go out for lunch.